Think before you franchise

Co-owner of world’s first Dunkin’ Donuts store offers his advice for success

By Doug Bailey| April 5, 2016

Anyone contemplating an opportunity to invest in a franchise would do well to chat with Victor Carvalho.

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Carvalho is the affable co-owner of the world’s first Dunkin’ Donuts shop in Quincy. It was 1955whenthe original owner signed thefirst franchise agreement for a donut shop in Worcester and, well, you know the rest.

Victor Carvalho

In 1979, Carvalho’s father Jose, a Rhode Island factory worker, dropped everything and bought the original Dunkin’ franchise on Southern Artery when it went on the market. Today, it has the historical signage, décor, and quaint aesthetic of another era thanks to a retro renovation in 2011, the only throwback facelift Dunkin’ has ever done.

Carvalho and his brother Octavio parlayed the store and two other Dunkin’ franchises originally opened by their father to their current eight franchises in southeastern Massachusetts.

Victor Carvalho’s knowledge of the franchise industry didn’t come from business classes or an MBA degree mill. All he knows about running a successful franchise he learned at ground level. Or, more exactly, from behind the speckled yellow counter at his donut shop.

“I’ve been working here since I was a kid, all through high school,” said Carvalho, 48. “Originally, everything was done in-house, all the baking and so forth, and I learned every bit of it.”

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Quincy actually might be considered Ground Zero of the franchise industry. Almost 20 years before Dunkin’ opened its first shop there, a fellow named Howard Deering Johnson signed what is believed to be the first franchise agreement in the U.S. when he persuaded an acquaintance to open a Wollaston branch of his successful Quincy ice cream shop named after himself. Howard Johnson’s, of course, became the largest restaurant chain in the nation throughout the 1960s and ‘70s. Quincy’s reputation as a franchise mecca was carved.

Passion is the first key to success

In 1948, William Rosenberg founded the Open Kettle restaurant in Quincy, which became the first Dunkin’ Donuts in 1950. Carvalho’s father took over 29 years later, after the franchise was put up for sale by Rosenberg’s sister, Bertha Schwarz, who was retiring years after becoming the second owner of the store.

The world’s first Dunkin’ Donuts in Quincy

When the elder Carvalho retired in 1994, there was no question that Victor and Octavio would take the reins. Having a brand like Dunkin’ behind you obviously gives one a leg up in competing with other restaurant franchises, but Carvalho believes success is never a given.

“To me, you have to have a passion for it,” he said. “Yes, there are people who invest in a franchise for just the financial opportunity. But I think you have to love the product and love what you do first and foremost.”

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Carvalho has checked off every item on the list of factors that go into making a successful franchise, and then some.

Right business model – Who could doubt Dunkin’s business model to enhance customer value at convenient locations?

Scale – There are significant cost savings associated with the large production scale of a standardized menu — i.e., the bigger the production scale, the lower the cost per menu. Dunkin’ is at a distinct advantage with more than 11,000 franchised shops in 36 countries compared to, say, Krispy Kreme’s 987 stores. It also has an enviable operating margin (the revenue left over when all expenses are taken out) of nearly 40 percent, versus an estimated eight percent for a brand such as Panera Bread.

Scope – Offering different products produced by a single corporation, rather than by different corporations, can result in a higher return on assets. While Dunkin’ may not show as high in this category as some of its competitors, the menu is constantly expanding and updating to reflect changing customer tastes.

Market Saturation – One might think that Dunkin’ is rapidly approaching saturation, which means it wouldn’t have much room to grow. But its own website shows there are still franchising availabilities in 27 U.S. states, plus Puerto Rico. Six other states have been earmarked as “future markets.”

Location – Dunkin’ supports its franchises by scouting the best locations, relying on a long history and experience with siting and opening successful franchises.

Support from the franchisor – This, in fact, may be one of the key ingredients to a successful franchise. Dunkin’ provides all levels of support, Carvalho said, from development and construction management to training and operations management.

But it’s not all top down, he said.

“The company has advisory boards, both nationally and regionally, made up of franchise owners who provide a great deal of input from the ground level,” said Carvalho. “Corporate is always listening and trying to stay ahead of the curve in terms of the competition and what the customer wants.”

Carvalho can make the franchising business sound easy. But, Dunkin’, as the 13th largest global franchise with decades of experience behind it, can likely make it all look pretty effortless (okay, maybe you have to look beyond the $200,000 – $1.6 million initial investment and the franchise fees of between $40,000 and $90,000.) But with a lesser-known brand — and there are a lot of them — entering the franchise business can be daunting, expensive, and risky.

Exploring franchises

A website called franchiseopportunities.com shows there are nearly 200 franchises up for grabs in Massachusetts alone. There are some familiar names, such as Midas, Supercuts, and Meineke. Others are clearly newcomers to the region — Ipanema Brows and Waxing, Git-R-Done Energy and Hangover Shot, and Slip Doctors (the leaders in floor safety). There’s even a franchise for people wanting to be franchise consultants.

The initial cash investment for these businesses runs from $5,000 to $400,000 with the average around $75,000. Trying to determine which ones have the best chance for success is difficult. Some franchise trade groups tout a 95 percent success rate for franchises while others, including the U.S. Small Business Administration, contend that seven out of 10 new franchise businesses don’t make it beyond the first two years.

So, how does one comb through the various options and decide what works for them?

“Due diligence, or, rather, do your homework,” said Suzanne Cummings of Cummings Franchise Law of Stoneham, which specializes in legal issues for both franchisees and franchisors. “You need to know what the real terms of the agreement are. The franchisor will give you a franchise agreement but they are required by law to also provide a franchise disclosure document and give you 14 days to review and decide.”

The disclosure document, sometimes as hefty as 500 pages, will tell a prospective owner what level of expertise and guidance can be expected from the franchisor.

“What exactly are your obligations and what is expected of you will be explained in the disclosure document,” Cummings said. “It’s really an undertaking to go through it and should be done with an attorney or CPA or someone who has had a lot of experience with franchises.”

Some of the many other issues covered in the FDD include:

Is financing available?

What level of advertising support will be offered?

Who are the company officers and what level of experience do they have?

What is the franchisor going to provide; are there personal guarantees?

Is there a history of litigation against the company?

How long has the company been in business?

Is the trademark registered or have they just filed for it, and what is the plan if the trademark is not approved?

“Some franchisors will negotiate terms,” said Cummings. “The big established ones with proven track records and a particular formula most likely won’t. But others will.”

Yet it is the biggest franchises with a history of success that will offer the least risk. Cummings said brand recognition is often the most important factor in the success of a franchise.

“I’ve seen franchises open up that are based in other parts of the country and no one has heard of them and they really can have a hard time,” she said. “Better to go with a name everyone recognizes.”

The SBA offers a free “Introduction to Franchising” exercise on its website “Learning Center” that presents an overview, pros and cons, and helps you determine if franchising is right for you.

For Carvalho, though, the key is to love the work.

“In the end, we’re just small business people with ties to our community and a passion for what we do,” he said. “You have to be willing to go waist deep into it, learn it inside and out and love it.”